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Cost-efficiency and quality regulation of energy network utilities

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  • Ovaere, Marten

Abstract

This paper studies linear cost-efficiency and quality incentives that are increasingly being used to regulate electricity and gas network utilities. The analysis shows that cost and quality incentives have asymmetric impacts on firms’ choices of efficiency and quality, and that the incentive powers should be equal and less than maximal when there is information asymmetry about firm costs and a dislike for network utility surplus. As in most existing regulations quality incentives have a higher power than cost-efficiency incentives, the model predicts that supplied quality is too high. Finally, the paper discusses examples of linear sliding-scale incentive regulation in Norway and Great Britain. The findings of this study provide guidance for regulators and policymakers looking to optimally use linear incentives to regulate energy network utilities.

Suggested Citation

  • Ovaere, Marten, 2023. "Cost-efficiency and quality regulation of energy network utilities," Energy Economics, Elsevier, vol. 120(C).
    • Handle: RePEc:eee:eneeco:v:120:y:2023:i:c:s0140988323000865
    DOI: 10.1016/j.eneco.2023.106588
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    More about this item

    Keywords

    Energy network regulation; Quality regulation; Incentive power; Incentive regulation; Energy transmission; Energy distribution;
    All these keywords.

    JEL classification:

    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L90 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - General
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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